Beth Rizkal, Author at The CJ Group

Higher Compensation Could Help You Attract and Keep Workers

Posted on October 7, 2019 by Beth Rizkal

If your manufacturing company struggles to recruit and retain quality workers, you’re not alone. Widespread skills gaps and rising fringe benefit costs mean that tens of thousands of U.S. manufacturers are facing a critical labor shortage. A possible solution is to offer workers higher pay. But before you up the ante on compensation, read this.

Labor Crisis

Recent surveys indicate worrisome trends in the manufacturing sector. The skills gap and need to attract and retain a skilled workforce continue to be manufacturers’ main concerns, according to a July 2019 report by the Manufacturing Institute (MI), “The Aging of the Manufacturing Workforce: Challenges and Best Practices.”

“Manufacturers face a workforce crisis with more than half a million unfilled manufacturing jobs today and 2.4 million jobs that may go unfilled by 2028,” said Jay Timmons, chairman of the board of the MI. Currently, approximately 25% of the manufacturing workforce is over 55 years old. Meanwhile, the industry is having trouble attracting enough new, younger workers with the right skills and qualifications.

The MI’s findings were confirmed by another study released by the National Association of Manufacturers (NAM). The 2019 National Manufacturing Outlook and Insights report reveals that manufacturers consider the labor and skills gap to be their greatest barrier to growth, with 52% citing it as an issue.

Unfortunately, there’s no silver-bullet solution. Many companies are trying to retain older workers past their scheduled retirement date. But you may also want to review your compensation packages to remain competitive in today’s tight labor market.

To determine the best compensation solution, work through the following five steps.

Five Considerations

1. Support your corporate culture. Ultimately, your culture determines how, and how well, your plant operates. Think about what you can do to attract, motivate and retain employees who will support your business plan and help you reach organizational goals. What role might compensation play in reaching these skilled and dedicated workers?

2. Pick best behaviors. Drill down to the specific types of behavior you want to reward. Is performance the sole or main driving force behind pay increases? Do you also want to reward other qualities, such as attendance and loyalty? What about unusual talents that set certain workers apart?

Increasingly, manufacturers are paying employees for having job-related skills, instead of based on “traditional factors” such as tenure, education or years of experience. Think about how you can allocate compensation dollars where they’ll be the most effective.

3. Monitor the competition. It’s not just what you’re willing to pay workers, but what the competition is offering. How are your main competitors compensating workers? If they’ve raised pay rates or introduced new benefits that are giving them an edge in the labor market, you may need to follow suit.

Don’t limit your competitive research to fellow manufacturing companies. These days, workers, particularly younger ones, frequently cross industries when searching for a job. If you hope to lure someone working in the construction field, for example, you may want to offer flex-time benefits. An ex-service member, on the other hand, may seek a well-defined “employee value proposition” that maps out the skills he or she will acquire and the pay raises associated with mastering those skills.

4. Build it into your budget. Crunch the numbers with your financial advisors to determine what your budget can handle. Even if you can afford to pay higher compensation now, you need to ask whether it’s in your company’s best interest over the long term. If you decide to hold pay rates steady, you may still be able to attract workers by offering low or no-cost benefits, such as extra time off or childcare options.

5. Regularly review your compensation plan. Whatever you decide to do about compensation, it isn’t a get-it-and-forget-it proposition. Closely monitor the impact of any changes (or lack of changes) in your compensation model. Are you receiving more job applications, or are employee tenures rising? Is the labor market starting to shift to favor employers? Trends and developments require that you review and possibly tinker with your pay formulas.

Manufacturing Day Is Here!

Manufacturing Day is an annual event organized by the National Association of Manufacturers and supported by other industry groups including the Manufacturers Institute and the National Institute of Standards and Technology. This year, it kicks off on Friday, October 4, 2019, with local activities continuing throughout the month.

The awareness-raising event encourages manufacturers and educational institutions to open their doors to students, parents, teachers and community leaders. Students can learn about careers in manufacturing and the skills manufacturing companies are seeking. You can find activities in your local area by visiting the Manufacturing Day website.

Can You Afford It?

The labor shortage is real, and no manufacturer can afford to bury its head in the sand. Offering a more attractive compensation package may help your company. But before you publicize the decision, talk with your financial advisors to make sure you can afford it.

Safety First: Protecting Your Construction Crews Near Roadways

Posted on October 4, 2019 by Beth Rizkal

You know how hazardous construction sites can be for crews. That’s why you require workers and supervisors to adhere to strict safety guidelines in work zones.

But what about safety issues involving motorists who enter your work sites, usually unintentionally? Every year, about two-thirds of construction businesses experience at least one vehicle intrusion into a workzone, according to a recent survey by Associated General Contractors (AGC) of America. When this happens, the vehicle’s driver and passengers risk injury or death — and the vehicle endangers the safety and lives of workers. The AGC survey found that 28% of workzone crashes resulted in injured workers and 8% resulted in a fatality.

Make a Plan

When it comes to protecting workers in construction zones, the tone at the top matters. Make sure workers and clients know that you value and prioritize safety — even if it means jobs run longer or a bit over original estimates. Another big part of promoting a safety-first culture is educating workers about potential workzone hazards. Don’t forget to include part-timers in training sessions.

To address roadway hazards specifically, create a written safety plan. Your plan should consider worksite variables — including different traffic conditions, types of roads, the weather, and project scopes and durations — and spell out procedures for protecting workers.

8 Steps: Several best practices can also help keep everyone safe on construction jobsites near roadways.

Consider including these in your safety plan:

1. Operate off-peak. If possible, work near busy roads should be performed during off-peak hours on weekdays and on weekends. Consider detours, temporary roads or bridges to navigate traffic away from workers.

2. Inspect workzones daily. Yes, daily. Note any maintenance issues, drop offs, uneven pavement or other risky conditions and address them immediately. Also check signage every day and assess whether signs are as effective as they could be.

3. Show your colors. Require everyone in the workzone to wear high-visibility vests and hard hats at all times — even if they’re only on site for few minutes. When working at night, crews should wear reflective clothing and hard hats with lights.

4. Put up barriers. Concrete barriers reduce risks for both workers and motorists. Attenuator trucks can also absorb the impact of a crash. But while you should be proactive about providing protection, don’t overdo it. Placing barriers everywhere can increase the danger that workers installing them will get hurt.

5. Monitor motorist speed. Reducing the speed limit in workzones lowers fatality rates, no doubt about it. But setting speed limits too low may lead some drivers to refuse to slow down at all. If one driver slows to the posted limit and another doesn’t, the vehicles could collide. Or the speeding driver may instinctively turn the wheel upon braking and crash into your workzone.

6. Observe federal guidelines. Adhere to the Federal Highway Administration’s Manual on Uniform Traffic Control Devices standards. This includes providing clear guidance to motorists entering a workzone. Be sure to give drivers sufficient warning by placing signs farther from the worksite when there are hills, curves or other visibility issues.

7. Provide “back-up” support. When trucks and other equipment back up, it creates hazards for workers in the vicinity. Even though these vehicles blast back-up alarms, some workers may ignore them. Consider placing “spotters” in areas where people are working or walking. And develop an internal traffic control pattern so that workers know where trucks are coming in and leaving.

8. Rely on new technology. Use motion-sensing intrusion detection alarms to notify workers when a vehicle has crossed into a workzone. You might also employ variable message boards or warning signs based on sensor data to notify motorists of any delays. This way, drivers can choose to take different routes to their destination. Portable rumble strips can help alert distracted drivers that they’re entering a workzone.

Putting People First

Given the availability of safety-related technology, there’s no excuse for letting work crews take unnecessary risks. Even if safety costs shave your profit margin, you know how important it is to put people first.

14 Tax-Favored Fringe Benefits: What’s the Right Mix for Your Business?

Posted on October 3, 2019July 22, 2024 by Beth Rizkal

Job applicants look at more than just wages when evaluating potential employers. They consider the whole compensation package, including fringe benefits and perks. These add-ons enable employers to cast a wider net in the job market, helping them attract and retain top-quality workers.

Unfortunately, tax breaks for some fringe benefits were eliminated or suspended by the Tax Cuts and Jobs Act (TCJA). (See “Some TCJA Provisions Could Cost You” at right.) However, some other fringe benefits are still deductible by employers and tax-free to employees.

Some TCJA Provisions Could Cost You

The Tax Cuts and Jobs Act (TCJA) includes tax breaks for both individuals and businesses. But some breaks were limited or eliminated. Notably, the rules for some employer-provided fringe benefits are less taxpayer friendly than before.

For example, tax-favored treatment for certain transportation fringe benefits has been cut by the TCJA. Employers can no longer deduct the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety. Employers also can’t deduct qualified employee transportation fringe benefits, such as parking allowances, mass transit passes and van pooling. These benefits are still tax-free to recipient employees. But the tax-free amount can’t exceed a maximum monthly dollar limit, adjusted for inflation, which is $265 for 2019.

The TCJA also temporarily eliminates tax-free employer reimbursements for job-related moving expenses (except for certain military personnel). Any employer reimbursements must be reported as taxable income on a nonmilitary employee’s W-2. This provision is effective for 2018 through 2025.

In addition, under the TCJA, employers can deduct only 50% of the cost of meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. (Under the pre-TCJA rules, these meals were 100% deductible by the employers and tax-free to the recipient employee.)

After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises won’t be deductible at all. Nevertheless, the meals will continue to be tax-free to employees as a de minimis benefit.

Other benefits that remain taxable to employees and nondeductible by employers under current law include:

Excessive mileage reimbursements,
Excessive education benefits,
Work clothing suitable for regular wear,
Cash awards and prizes, and
Personal use of a company vehicles.

For more information about the tax rules for fringe benefits, contact your tax advisor.

Here are 14 popular benefits that remain on the books after the TCJA.

1. Achievement awards. The tax law defines “achievement award” as an item of tangible personal property granted to an employee for either length of service or promoting safety. Examples include gold watches and smartphones. For a written qualified plan, the maximum tax-free award is $1,600, while the maximum for a nonqualified plan is $400.

2. Athletic facilities. Employees can benefit from tax-free use of an onsite athletic or health club facility if the employer operates it. Such a facility is available to the employee, his or her spouse and any dependents. Furthermore, it may be used by retired employees and shareholder-employees. This category of benefits includes gyms, tennis courts and pools.

3. Company vehicles. As a general rule, the use of a company-provided vehicle for business is tax-free to the employee. However, the value of personal use (other than “de minimis” use) must be included in the employee’s taxable income, based on special IRS computations.

4. De minimis benefits. These tax-free perks can range from free use of the company’s copying machine for personal reasons to free coffee, soft drinks and donuts. It also includes most birthday gifts from the company and holiday hams or turkeys.

5. Dependent care assistance. The first $5,000 of dependent care assistance paid by an employer under a written plan is tax-free to employees. To qualify, the dependent must be:

A child under age 13, A child who is physically or mentally unable to care for himself or herself, or A spouse who is physically or mentally incapable of self-care. However, the amount of the exclusion can’t exceed the earned income of a single employee or the earned income of the lower-paid spouse if the employee is married.

6. Educational assistance plans. A company can provide tax-free payments of up to $5,250 for college or graduate school tuition, books, fees and supplies under an educational assistance plan. The courses covered under the plan do not have to be related to the job. But any payments for courses involving sports, games or hobbies are covered only if the course is job-related or required as part of a degree program.

7. Employee discounts. A company can provide tax-free discounts to employees on its products or services. For products, the discount percentage can’t exceed the gross profit percentage of the price at which the product is offered to regular customers. For services, the discount percentage can’t be more than 20% off the price at which the service is offered to regular customers.

8. Group-term life insurance. This is usually a prized perk for highly-paid executives, even though there’s a tax price attached to “excess” coverage. Only the first $50,000 of coverage under a group-term life insurance plan is tax-free. For instance, if an executive earning $150,000 is covered at three times salary, he or she owes tax on $400,000 of coverage ($450,000 – $50,000). The tax hit, which is computed under an IRS table based on the employee’s age, is generally reasonable.

9. Health insurance. Premiums paid by an employer under a health insurance plan are tax-free to the employees and deductible by the employer as long as the plan is open to rank-and-file workers. Additionally, employees can take advantage of tax-favored flexible spending accounts (FSAs) for qualified healthcare expenses and Health Savings Accounts (HSAs) funded by employers.

10. Mobile phones. The value of the business use of an employer-provided mobile phone provided primarily for noncompensatory business reasons is excluded from taxable income. Generally, this covers employer-provided devices that are to be used for business purposes.

11. Professional and civic organization dues. Dues paid by an employer on behalf of employees to professional and civic organizations are tax-free. But there must be a business purpose to having membership in the organization. It can’t just be a social club.

12. Qualified retirement plans. Generally, contributions provided under 401(k), pension, profit-sharing or other qualified retirement plans are exempt from tax and these amounts can grow without any current tax erosion until employees make withdrawals. Also, contributions are subject to generous annual limits, including potential matching contributions to a 401(k) by an employer, but strict nondiscrimination requirements must be met.

13. Supper money. This is tax-free to employees if it’s 1) provided only on an occasional basis and 2) due to special circumstances. In the case of meals or meal money, the benefit must be provided to enable the employee to work overtime, even if the need to work overtime was foreseeable. The employer can deduct 50% of the cost.

14. Working condition fringe benefit. This includes property or services provided to employees so they can do their jobs. Examples include job-related education and business-related travel costs.

As you can see, there are still plenty of opportunities for employers to reward employees with tax-free benefits even after the TCJA changes. Contact your tax advisor to discuss the best options for your situation.

Year-End Strategies to Reduce AGI

Posted on October 1, 2019 by Beth Rizkal

Reducing your current-year adjusted gross income (AGI) is usually a tax-smart idea. Here are ten ways to reduce your AGI (and modified AGI) over the short and long run.

Closeup on AGI

AGI equals all taxable income items minus selected deductions for such items as deductible IRA and retirement plan contributions and alimony payments required by pre-2019 divorce agreements.

Lowering your AGI reduces your taxable income for the year and your exposure to unfavorable AGI-based provisions. For example, lowering AGI can increase the amount of Social Security benefits that you can receive federal-income-tax-free and increase your allowable higher education tax credits.

5 Ideas for 2019

It’s not too late to reduce your AGI for the current tax year. Consider these last-minute tax planning strategies:

1. Sell loser securities held in taxable brokerage firm accounts. The losses can offset earlier gains in such accounts. This will also help higher-income taxpayers reduce their exposure to the 3.8% net investment income tax (NIIT). Note: Without gains to offset, losses aren’t that helpful because they’re limited to $3,000 per year. If your net capital loss is more than this limit, you can carry the loss forward to later years.

2. Gift soon-to-be-sold appreciated securities to family members. Assuming the recipient is in a lower tax bracket, this strategy also can help reduce tax owed on the gain. But beware of the kiddie tax, which can potentially apply until the year your gift recipient turns 24.

3. Donate appreciated securities, rather than cash, to IRS-approved charities. The charity won’t owe tax on the gain — and you’ll get a deduction for the full fair market value of the donated securities if you’ve held them for more than a year. This strategy can also help higher-income taxpayers reduce their exposure to the 3.8% NIIT.

4. Maximize deductible contributions to tax-favored retirement accounts. Contribute as much as is allowed (and you can afford) to 401(k) accounts, self-employed SEP accounts, self-employed SIMPLE IRAs and other tax-favored retirement accounts. As a bonus, you’ll have a bigger nest egg when you retire.

5. Defer revenue from small businesses and accelerate business expenses. If you’re a cash-basis self-employed individual, you can take steps to postpone collections until 2020 or, conversely, accelerate deductions taken in 2019. For example, you might delay billing a customer until January for work completed near year end, or you might prepay deductible business expenses using a credit card.

5 Long-Term Strategies for Future Years

Sometimes taxpayers need to consider the long-term view — even if they might have to pay extra taxes in the short run. The following moves could help significantly over the long run, especially if tax rates are higher in future years:

1. Convert traditional retirement account balances to Roth accounts. The deemed taxable distributions that result from Roth conversions will increase AGI and potentially your exposure to the 3.8% NIIT in the conversion year. However, income and gains that build up in a Roth IRA won’t be included in your AGI in future years. That’s because qualified Roth distributions are federal-income-tax-free. Qualified Roth distributions are also free of the 3.8% NIIT.

In contrast, the taxable portion of distributions from other types of tax-favored retirement accounts and plans will be included in your future-year AGI. Plus, they’ll increase your future-year exposure to the 3.8% NIIT.

2. Invest taxable brokerage firm account money in growth stocks. Gains aren’t taxed until the stocks are sold. At that time, the negative tax impact of gains often can be offset by selling other securities that will incur losses for tax purposes. In contrast, stock dividends are taxed currently, and it may not be as easy to offset them.

3. Invest more taxable brokerage firm money in tax-exempt bonds. This would reduce your future AGI and your future exposure to the 3.8% NIIT. You can use tax-favored retirement accounts to invest in securities that are expected to generate otherwise-taxable gains, dividends and interest.

4. Invest in rental real estate and oil and gas properties. Rental real estate income can be offset by depreciation deductions; oil and gas income can be offset by deductions for intangible drilling costs and depletion. These deductions will reduce AGI.

5. Invest in life insurance products and tax-deferred annuity products. Life insurance death benefits are generally exempt from both federal income tax and the 3.8% NIIT. Earnings from life insurance contracts and tax-deferred annuities aren’t taxed until they’re withdrawn.

Multiple Levels of Tax Savings

Some of these strategies can reduce both your regular federal income tax (FIT) bill and, if applicable, your NIIT bill. If you’re self-employed, some may also lower your self-employment tax bill. Finally, these strategies can also reduce your state income tax bill, if you live in a state that assesses a personal income tax.

Some strategies may take some time to implement, however. There’s no time like the present to identify AGI-reduction strategies that can help your situation. Contact your tax advisor for more information.

To Capitalize or Expense: How to Treat Website Costs for Tax Purposes

Posted on September 9, 2019July 23, 2024 by Beth Rizkal

For most small businesses, having a website is a necessity. But what’s the proper tax treatment of the costs to develop a website?

Unfortunately, the IRS hasn’t yet released any official guidance on these costs. Therefore, you must extend the existing guidance on other subjects to the issue of website development costs.

Depreciable Fixed Assets

The cost of hardware needed to operate a website falls under the standard rules for depreciable equipment. Similar rules apply to purchased off-the-shelf software.

Specifically, once these assets are up and running, you can deduct 100% of the cost in the first year they’re placed in service, as long as that year is before 2023. This favorable treatment is allowed under the 100% first-year bonus depreciation break established by the Tax Cuts and Jobs Act (TCJA).

In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.

For tax years beginning in 2019, the maximum Sec. 179 deduction is $1.02 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount of qualifying property is placed in service during the tax year. The threshold amount is $2.55 million for tax years beginning in 2019.

There’s also a taxable income limit. Under that limit, your Sec. 179 deduction cannot exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable dollar limit, the phaseout rule and the taxable income limit).

Important: Software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses under Sec. 162.

Internally Developed Software

If you take the position that your website is primarily for advertising, you can currently deduct internal website software development costs as an ordinary and necessary business expense.

An alternative position is that your software development costs represent currently deductible research and development costs under Sec. 174. To qualify for this treatment, the costs must be paid or incurred by December 31, 2022.

A more conservative approach would be to capitalize the costs of internally developed software. Then you would depreciate them over 36 months under Sec. 167(f).

Payments to Third Parties

Some companies take the easy way out. They hire third parties to set up and run their websites. Payments to such third parties should be currently deductible as ordinary and necessary business expenses.

Expenses Incurred before Business Commences

Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. These so-called “start-up expenses” are covered by Sec. 195.

However, if your start-up expenses exceed $50,000, the $5,000 currently deductible limit starts to be chipped away. Above this amount, you must capitalize some or all of your start-up expenses and amortize them over 60 months, starting with the month that business commences.

Important: Start-up expenses can include website development costs. But they don’t include costs that you treat as deductible research and development costs under Sec. 174. You can deduct those costs when they are paid or incurred, even if your business hasn’t yet commenced.

Need Help?

Until the IRS issues specific guidance on deducting vs. capitalizing website development costs, you can apply existing guidance for other subjects. Your tax advisor will determine the appropriate treatment for these costs for federal income tax purposes. Contact your advisor if you have questions or want more information.

Should You Expand Your Product Line?

Posted on September 5, 2019 by Beth Rizkal

Even if your manufacturing company has been successful at selling its current line of goods, it’s probably not smart to keep producing the same products indefinitely. Now, in fact, is an excellent time to expand your product offerings. With global competition ramping up, the manufacturing market is only becoming more crowded and less certain. By anticipating customer needs, you can fortify your position and help ensure continued profitability.

4 Reasons to Consider Expansion

You probably know your market inside and out and take pride in the fact that customers are satisfied with your current products. Unfortunately, this may not be good enough. Here are four reasons to consider product line expansion:

1. Life cycle limits. Most manufactured goods have a limited life cycle. If your company makes products that have already passed through the introduction, growth and maturity stages, they’re probably on the decline. Products enter the decline stage when they no longer meet customer needs or their performance pales compared to new goods on the market — particularly if those new products rely on improved technology.

To avoid being left behind, stay on top of technological developments and upgrade accordingly. If you haven’t turned out version 2.0 or 3.0 of your flagship product yet, it’s probably time to do so.

2. Different market sectors. Expanding your product line enables you to tap new markets and service new industries. A men’s dress shoe manufacturer, for example, could expand its product line to include casual footwear. Or the company could customize existing products for a different target market, such as adolescents. Market research can provide insights into what products consumers or business customers are demanding and what they’re willing to pay.

3. Customer needs. Customer needs change over time, requiring manufactured goods to change with them. Encourage input from customers by distributing surveys and tracking comments on your website and social media accounts. Make sure you follow up and respond directly to customers with suggestions, concerns or complaints. And before you start investing money in new products, be sure to assemble focus groups where you provide potential customers with product previews.

4. Customer loyalty. A solid list of repeat and long-time customers is a hallmark of a successful business. With an established customer base, you can add products or variations of existing products without putting much additional stress on your marketing budget.

Research the purchase history of existing customers to identify products that competitors are currently supplying. For example, a manufacturer of construction equipment can develop new products that offer greater variety and innovation to crews in the field.

Secrets of Success

Let’s say you’ve decided to pursue product line expansion. How should you go about it? For starters, do your due diligence. Solicit customer feedback to ensure a market exists for proposed products.

Also make sure any proposed products make sense from a financial standpoint. Given operational or supply chain constraints, can you make goods cost-effectively? What kind of gross margin and break-even point are you looking at? Will you need to invest in new equipment to make the new products, or do you have excess capacity to handle the orders with your existing equipment? Likewise, are your existing distribution channels up to the job or will you need to hire sales representatives or build a new e-commerce site?

It’s also important to address macroeconomic factors. Everything from sluggish consumer spending to rising interest rates to foreign tariffs could make launching a new product now difficult.

Make sure you keep an eye on the competition, too. Clothing manufacturers have long used competitors as a resource by modeling new designs (with tweaks) on already-successful ones. Sometimes, jumping on current trends is easier and less expensive than attempting to create new ones.

Creative Solutions

Many manufacturing companies begin to decline because they keep producing the same products they’ve made “forever.” To remain competitive, monitor customer trends and technological advances and respond with goods that are desirable in today’s marketplace.

Look for creative solutions — even those outside your field. For instance, an aerodynamic design or stitching technique that works for making sports equipment might be co-opted by a furniture manufacturer. At the very least, investigate any promising new ideas, regardless of their origin.

Four Depreciation Tax Breaks To Build On

Posted on September 3, 2019 by Beth Rizkal

Even before passage of the Tax Cuts and Jobs Act (TCJA), construction companies and other types of businesses were eligible for several generous depreciation-based tax breaks. Now it’s a veritable tax bonanza! If you take advantage of one or a combination of the following four provisions, you may be able to depreciate all or most of the cost of business property the first year it’s placed in service.

1. Section 179 Expensing

Under Section 179 of the Internal Revenue Code, a business can elect to “expense” (currently deduct) the cost of qualified property placed in service, up to an annual limit. However, the deduction can’t exceed the amount of income from the business activity and it’s subject to a phaseout above a specified threshold.

Before recent tax reform, the maximum Sec. 179 deduction only gradually increased to $500,000, and the phaseout threshold peaked at $2 million. The TCJA has effectively doubled the maximum deduction to $1 million and increased the phaseout threshold to $2.5 million, with inflation indexing.

So, if your construction business has 2019 earnings of $5 million and it buys $1 million of equipment, it can write off the entire cost this year. It’s important to note, however, that some businesses will be affected by the taxable income limit.

2. Bonus Depreciation

Thanks to another TCJA provision, the 50% bonus depreciation deduction has doubled to 100%. It’s effective for qualified property placed in service after September 27, 2017.

For bonus depreciation purposes, qualified property includes tangible property depreciable under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. Significantly, the TCJA has also expanded the definition of qualified property to include used property. Previously, only new property was eligible.

By combining Sec. 179 deduction and bonus depreciation, you may be able to write off the full cost of depreciable business property the first year you place it in service. But be aware that the bonus depreciation deduction will be phased out after five years as follows:

80% for property placed in service in 2023,
60% for property placed in service in 2024,
40% for property placed in service in 2025, and
20% for property placed in service in 2026.

After 2026, bonus depreciation will no longer be allowed (unless, of course, new tax legislation extends it).

3. MACRS Deductions

MACRS is the method most often associated with standard depreciation deductions. Under this method, the cost of qualified property placed in service is recovered over a period of years. The system is designed to provide bigger write-offs in the early years of ownership.

Annual deductions are based on the useful life of the property. For example, computers have a five-year write-off period, while most other equipment is depreciated over seven or 15 years. Typically, a construction business may use Sec. 179 and bonus depreciation deductions with MACRS deductions for any remainder.

4. Business Vehicle Write-offs

The TCJA has also enhanced write-offs for business vehicles. According to the special rules for “luxury automobiles,” depreciation deductions are subject to annual limits. Previously, these limits kicked in at relatively low levels. But vehicles placed in service after 2018 can benefit from increased dollar limits that are indexed for inflation. Now, the annual deduction limits for a passenger car or light duty truck or van are:

$10,000 for the first year placed in service,
$16,000 for the second year,
$9,600 for the third year, and
$5,760 for each succeeding year.

The TCJA retained the $8,000 additional first-year depreciation break for passenger vehicles. Therefore, you should be able to deduct up to $18,000 the first year you place a vehicle in service.

Watch Out for the Last-Quarter Tax Tap

Despite enhancements to Section 179 and bonus depreciation, you may decide to use the Modified Accelerated Cost Recovery System (MACRS) to recover the cost of business property over time. If so, beware of a little-known tax trap.

Typically, MACRS deductions are calculated under a “mid-year convention.” This means that you benefit from a half-year’s deduction, regardless of when during the year you placed the property in service. However, if property placed in service in the year’s last quarter — October 1 through December 31 — exceeds 40% of the cost of all assets placed in service during the year, depreciation deductions for all property are figured under the “mid-quarter convention.” This generally reduces depreciation deductions for the year.

Boon for Business

TCJA’s depreciation-related breaks are widely recognized as a boon for businesses. As you contemplate making year-end purchases, be sure to factor in potential tax advantages.

Expanding Retirement Plan Options for Small Businesses

Posted on September 1, 2019 by Beth Rizkal

A new final rule from the U.S. Department of Labor (DOL) clarifies some of the ins and outs of multiple employer plans (MEPs). These are defined contribution retirement plans — such as 401(k) plans — that are sponsored by an association or employer group on behalf of member employers.

Clarifying the Rules

Existing DOL rules already allow MEPs to exist. And the new rule, which goes into effect on September 30, 2019, was designed to “clarify and expand the circumstances under which U.S. employers … may sponsor or adopt [MEPs].”

Among other requirements, groups and associations of employers that sponsor MEPs can have as members either:

A group of local businesses (for example, a chamber of commerce), or
An association of businesses within the same industry, regardless of location.

MEPs to the rescue?

The idea behind multiple employer plans (MEPs) is simple: When negotiating fees with retirement plan services companies, there’s strength in numbers. Fixed costs associated with managing a 401(k) plan make the average cost per plan participant higher for smaller employers than for large ones.

In fact, the average fee charged to plans with fewer than 100 participants is nearly 50% higher than that of larger plans, based on total fees’ percentage of plan assets, according to the 401(k) Book of Averages.

Besides direct plan administrative costs, reasons that small employers choose not to sponsor retirement plans include the amount of time it would take them to deal with the paperwork, plus the risk of litigation if things go badly with the plan.

Although MEPs can help employers lower the average cost per participant, it’s important to look beyond cost when deciding on a retirement plan. Employers should also consider the simplicity of outsourcing plan administration and sharing fiduciary responsibilities with the plan sponsor. Contact your financial advisor to discuss which options are available to you and what’s right based on your situation.

PEO Guidance

The most significant feature of the new rule is its roadmap for professional employer organizations (PEOs) to sponsor MEPs. PEOs assume the primary legal obligations of an employer, then lease its employees to companies that put them to work under contract with the PEO.

The final rule differs from the proposed version with respect to a PEO’s eligibility to sponsor MEPs. Specifically, the regulations provide a four-part “safe harbor” test.

The PEO is responsible for paying wages to employees, without regard to the receipt or adequacy of payment from those clients.
The PEO takes responsibility to pay and perform reporting and withholding for all applicable federal employment taxes, without regard to the receipt or adequacy of payment from those clients.
The PEO plays a definite and contractually specified role in recruiting, hiring and firing workers, in addition to the client-employer’s responsibility for recruiting, hiring and firing workers.
The PEO assumes responsibility for, and have substantial control over, the functions and activities of any employee benefit that the PEO is contractually required to provide, without regard to the receipt or adequacy of payment from those client employers for such benefits.

The tests are designed to ensure that a company representing itself as a PEO acts as a bona fide employer, and bears responsibility for employee benefits, including a MEP-style plan.

Open MEPs

The new rule does not include a provision that would allow an association to open its membership to businesses of any industry sector in any part of the country to join. Such an entity would be called an “open MEP” or a “pooled employer plan.” Instead, the final DOL rule asks stakeholders to offer their ideas on several regulatory questions around open MEPs. Responses are due by October 29.

A new federal law would be needed to throw open the gates to open MEPs. In fact, proposed legislation — the Setting Every Community Up for Retirement and Enhancement (SECURE) Act — facilitating open MEPs passed in the House in May 2019. But opposition has held the bill back so far in the Senate.

Fiduciary Liability

Joining an association or PEO that sponsors a MEP can help eliminate a significant portion of the fiduciary liability associated with retirement plan sponsorship — but not all of it. For example, the entity that sponsors the MEP is held responsible for fulfilling the basic legal requirements of running the retirement plan. However, as an employer, you’re responsible for choosing a MEP wisely to safeguard your employees’ interests. You also must watch how the MEP is performing overall.

Additionally, individual employers participating in the MEP must satisfy anti-discrimination requirements. Those rules apply to all ERISA plans. They’re intended to ensure that benefits aren’t skewed towards higher paid employees at the expense of the lower paid ones. The MEP administrator would perform the discrimination testing for you. But if you fail, it’s up to you to remedy the situation.

Beware: Even though you’re compliant with the antidiscrimination rules, you could still have problems. How? If one or more employers participating in a MEP are violating the rules, the entire plan could be disqualified.

Right for Your Small Business?

If you currently aren’t sponsoring a retirement plan — or you’re unhappy with the cost of your existing plan — a MEP might be a good solution. Also, if the SECURE Act becomes law, you might have more MEP options to choose from. Contact your financial advisor to determine what’s best for your situation.

Common Questions about Kids and Taxes

Posted on August 13, 2019July 22, 2024 by Beth Rizkal

Does your son or daughter work during the summer or school year? A part-time job can be a great way for your child to learn about financial responsibility. It can also teach a valuable lesson about owing taxes. In addition to explaining why the government takes money from kids’ paychecks, parents may need to help their children file their taxes by April 15.

Here are answers to common questions about the tax rules that may apply to kids.

Does My Child Need to File a Tax Return?

For 2019, your dependent child must file a federal income tax return in the following situations:

The child has unearned income of more than $1,100. If your child has more than $2,200 of unearned income, he or she may be subject to the so-called “kiddie tax.”
The child’s gross income exceeds the greater of 1) $1,100, or 2) earned income up to $11,850 plus $350.
The child’s earned income exceeds $12,200.
The child owes other taxes, such as the self-employment tax or the alternative minimum tax (AMT).

Even if your child isn’t required to file a tax return, one should be filed if federal income tax was withheld for any reason and would be refunded if a return is filed. It’s also necessary to take advantage of certain beneficial tax elections, such as the election to currently report accrued U.S. Savings Bond income that would be sheltered by your child’s standard deduction.

Who’s Responsible for Filing My Child’s Return?

A child is generally responsible for filing his or her own tax return and for paying any tax, penalties and interest. If a child can’t file his or her own return for any reason, the child’s parent, guardian or other legally responsible person must file it on the child’s behalf.

If the child can’t sign the return, a parent or guardian must sign the child’s name followed by the words “By (signature), parent or guardian for minor child.” If you sign a child’s tax return, you can deal with the IRS on all matters related to the return.

In general, a parent or guardian who doesn’t sign can only provide information concerning the return and pay the child’s tax bill. The parent or guardian isn’t entitled to receive information from the IRS and can’t legally bind the child to a tax liability arising from the return.

Can I Report My Child’s Income on My Tax Return?

For a given tax year, parents can choose to report their children’s income on their tax return if:

The child will be under age 19 (or under age 24 if a full-time student) as of December 31, and
All of the child’s income is from interest and dividends, including mutual fund capital gains distributions and Alaska Permanent Fund dividends.

So, kids with income from working part-time jobs don’t qualify. Your tax professional can tell you if this option is allowable and advisable in your specific family situation.

What’s the Kiddie Tax?

For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) revamped the kiddie tax rules. Under the TCJA, a portion of the kid’s (or young adult’s) unearned income is taxed at the higher rates paid by trusts and estates. Those rates can be as high as 37% and as high as 20% for long-term capital gains and dividends.

Under prior law, the kiddie tax rate equaled the parent’s marginal rate. For 2017, a parent’s marginal rate could have been as high as 39.6% or 20% for long-term capital gains and dividends.

Follow these steps to calculate your child’s taxable income:

Add the child’s net earned income and net unearned income.
Subtract the child’s standard deduction.

The portion of taxable income that consists of net earned income is taxed at the regular rates for a single taxpayer. The portion of taxable income that consists of net unearned income and that exceeds the unearned income threshold ($2,200 for 2019) is subject to the kiddie tax. This amount is taxed at the higher rates that apply to trusts and estates.

Unearned income for purposes of the kiddie tax means income other than wages, salaries, professional fees, and other amounts received as compensation for personal services. Some examples of unearned income are capital gains, dividends and interest. Earned income from a job or self-employment is never subject to the kiddie tax.

Important: For a given tax year, any child (or young adult) who meets the following conditions must file Form 8615, “Tax for Certain Children Who Have Unearned Income”:

The child has more than $2,200 of unearned income (for 2019). He or she is required to file Form 1040. He or she is 1) under age 18 as of December 31, 2) age 18 as of December 31 and didn’t have earned income in excess of half of his or her support, or 3) between ages 19 and 23 as of December 31 and a full-time student and didn’t have earned income in excess of half of his or her support. He or she has at least one living parent as of December 31. He or she doesn’t file a joint return for the year.

Child-Related Tax Breaks

It can be expensive to raise a child. Fortunately, parents may be eligible for several child-related federal income tax breaks, including:

Child credit. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) increases the maximum child credit from $1,000 to $2,000 per qualifying child. The hitch? Only kids under age 17 qualify.

Up to $1,400 of this credit can be refundable, meaning you can collect it even if you don’t owe any federal income tax. Under the TCJA, the income levels at which the child credit is phased out have significantly increased, so many more families now qualify for it.

Tax credit for over-age-16 dependents. For 2018 through 2025, the TCJA establishes a new $500 tax credit that can be claimed for a dependent child who isn’t under age 17.

The term “dependent” means you pay over half the child’s support. However, a child in this category also must pass an income test to be classified as your dependent for purposes of the $500 credit. For 2019, your over-age-16 dependent child passes the income test if his or her gross income doesn’t exceed $4,200.

Higher education tax credits. Paying college costs could qualify parents for one of two federal tax credits. First, the American Opportunity credit can be worth up to $2,500 during the first four years of a child’s college education. Second, the Lifetime Learning credit can be worth up to $2,000 annually, and it can cover just about any higher education tuition costs.

Both higher education credits are phased out at higher income levels. But the Lifetime Learning credit is phased out at much lower income levels than the American Opportunity credit. Also, you can’t claim both credits for the same student in the same year.

Deduction for student loan interest. This deduction can be up to $2,500 for qualified student loan interest expense paid by a parent. However, for 2019, the deduction begins to phase out when modified adjusted gross income is above $70,000 for single taxpayers and $140,000 for married couples filing jointly.

In addition to these tax breaks, single parents may be able to file their taxes using head of household (HOH) filing status. This is preferable to single filing status, because the tax brackets are wider and the standard exemption is bigger (if you don’t itemize deductions). HOH status is available if:

Your home was for more than half the year the principal home of a qualifying child for whom a personal exemption deduction would be allowed under prior law, and You paid more than half the cost of maintaining the home.

Where Can I Find More Information?

The rules for kids can be complicated in certain situations, especially when the kiddie tax comes into play. Contact your tax advisor if you have additional questions about the tax consequences of working a part-time job or reporting unearned income from investments, as well as potential tax-saving opportunities that come with parenthood.

Changing Jobs? What Will Become of Your 401(k) Balance?

Posted on August 9, 2019July 22, 2024 by Beth Rizkal

Most private sector employers, for better or worse, put you in the driver’s seat when it comes to saving for retirement. If you’re a genuinely savvy and diligent investor, you might prefer the flexibility of rolling over your accumulated retirement savings into an IRA. This choice assumes, however, that your next employer’s 401(k) plan allows you to move money into it from another 401(k) plan. Most, but not all, do.

Keep in mind, there are some important distinctions between IRAs and 401(k)s that matter to retirement investing sophisticates and novices alike:

One bit of flexibility 401(k) plans typically offer is that you can borrow against your plan account balance penalty-free. (You’ll need to pay your account interest on the loan.) Loans aren’t possible with an IRA. And it might take you a while to accumulate enough money in a new 401(k) that you’re starting without a rollover to make a loan worthwhile.

Another plus for rolling over to your new employer’s 401(k) is that assets held in qualified retirement plans — which don’t include IRAs — are generally off-limits from debt collectors. There are exceptions, such as qualified domestic relations orders, money you owe the IRS and federal criminal cases. IRA assets can enjoy some protection from creditors, but the extent varies according to state law.

“Rule of 55”

Also, under some circumstances, you can take funds out of a 401(k) plan earlier than you can from an IRA without paying the 10% early withdrawal penalty that usually applies to withdrawals prior to age 59 1/2. The “rule of 55,” as it’s known, lets you start taking money out of your current 401(k) plan the year you turn 55 if you leave that job (whether it was your decision or your employer’s). However, it only applies to dollars you put into the plan during your stint with your most recent employer. So, you wouldn’t be penalized for having rolled over 401(k) dollars from a prior employer to an IRA, but it’s still useful to know about.

If none of those considerations matters a great deal to you, you can move to the next level of comparisons — investment options and costs. Suppose you’re relatively close to retirement and want to be very conservative with your investments. “Stable value” funds are a popular option for conservative investors. These are essentially bond portfolios that provided a fixed return over a set period, backed by an insurance company guarantee. They’re available only in 401(k) plans, not IRAs.

In theory, though, you can get just about any other kind of investment in an IRA. However, your IRA investment options will vary based on the financial institution you choose as your custodian. Also, some financial services companies give you incentives to invest in their own financial products, and penalize you if you opt for outside funds. That’s fine if you’re content with the firm’s own investments, but no one wants to feel trapped.

Focus on Fees

A broader potential hazard associated with IRAs is being stuck with “retail” class shares of mutual funds. Such shares carry higher fees than “institutional” shares generally (but not always) available to 401(k) investors. But you also need to consider differences in total expenses charged against your retirement assets, including 401(k) plan administrative costs. Often smaller employers pay higher administrative fees than larger plans, and those fees are typically borne by employees.

Even relatively small differences in combined fees can have a big impact on your retirement savings accumulation over time. For example, paying a half a percent more in annual fees on $12,000 in annual retirement savings over a 25-year period would reduce those savings by $65,000.

The quality and independence of the investment advice you’d receive in either scenario could also be an important consideration for your rollover decision. Employers generally use 401(k) advisors who are held to a “fiduciary” standard of care. The person or people within a company in charge of a 401(k) plan are also considered fiduciaries. This means they’re legally bound to act in your best interest — and vulnerable to being sued if they don’t. If you work with a traditional broker with your IRA, he or she might not be held to such a high standard.

That distinction doesn’t guarantee that one advisor will be better than the other, but it’s an important factor to take into consideration. Also, a relatively new player on the investment management scene — the “robo-advisor” — is an investment platform for IRA (and other) investors that can guide your choices with computer-generated recommendations.

Given the high stakes, don’t rush your decision on what to do with your 401(k) funds from a former employer. Chances are that your employer won’t try to force you to move your funds out of their plan — especially if you have at least $5,000 in your account. If that’s the case, you can take as long as you want to decide — including the choice of leaving the money right where it is.

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